Bonds Steady As Government Shutters

By Michael Aneiro

The U.S. government may have shut down but government bonds didn’t get the day off, and Treasuries are trading only marginally lower in the wake of the latest DC debacle. The ten-year Treasury note is down a mere 1/32 in price to yield 2.623%, per Tradeweb data, and the 30-year bond is down by 6/32 to yield 3.700%, per Tradeweb data.

In a note this week, Guy LeBas of Janney Montgomery Scott says if the shutdown lasts as long as the 21-day government shutdown nearly two decades ago, it would dent on economic growth by between 0.9% and 1.4%, with an immediate GDP impact of 0.7%:

But the real economic cost, which is extremely hard to measure, comes from heightened uncertainty. Greater uncertainty will create hesitancy on the part of businesses to embark on new projects, and encourage consumers (especially those who derive some income from government-related activities) to save rather than spend. In essence, an extended government shutdown has the potential to reverse a good portion of the Federal Reserve’s low interest rate stimulus. All of that said, it seems most likely that any government shutdown will be short-lived, and really designed as a brief negotiating tool rather than a long-term “nuclear option” threat.

Of course all of this pales in comparison to the possibility that the U.S. reaches its debt ceiling later this month. LeBas again:

Although the likely impact of a government shutdown is economic in nature, the potential for the US to reach the debt ceiling represents a far more significant threat, albeit one that’s much less-likely to be realized.

Given the government’s recent history of shooting itself in the foot to avoid any semblance of compromise during partisan budget negotiations, it’s hard to say what’s likely or unlikely to be realized next time around. Perhaps instead of threatening a sequester, the government can just say it will aim a missile at itself and launch it if it doesn’t reach a debt ceiling accord this month. Purely as a last-resort tactic to ensure a successful negotiation, of course. They’d never actually let it happen – right?